After last week ended with a furor about Special Counsel Robert Mueller’s investigation into the Trump campaign’s connection with Russian meddling in the US election, I thought that that the big question this week would be whether US politics take a new turn or not. So I was surprised to wake up this morning and find that it’s European politics, not US politics, that’s moving the market this morning.
German Chancellor Angela Merkel has been trying ever since the election on 24 September to form a coalition government, but the long-running coalition talks in Germany collapsed shortly before midnight local time on Sunday as one of the parties pulled out, saying its differences with one of the other parties were too great to bridge. The country may have to hold new elections again, but polls show that another round of elections would be likely to produce approximately the same result.
The news throws into question Merkel’s future as Chancellor. While she will remain as caretaker Chancellor, the form of the next government is now uncertain. This casts a huge shadow of uncertainty over all Europe. Decisions on everything from Brexit to sanctions on Russia will be more difficult and harder to predict.
As usual, uncertainty is bad for a currency and EUR has fallen sharply. At the same time, the uncertainty sparked a general “risk off” mood that sent safe haven assets sharply higher. CHF and JPY rose sharply, with CHF for once moving more than JPY on a “risk off” move, probably because this time the source of the risk is Europe, not North Korea. Gold and silver were also up sharply. Even GBP gained a bit, presumeably on people cutting long EUR/GBP positions.
I think the risk-off mood is likely to continue for some time, since this problem is not likely to be resolved any time soon. CHF strength in particular and JPY strength too may continue and of course EUR weakness, but I don’t think this is likely to remain positive for GBP. On the contrary, Merkel has been working on the Brexit negotiations to arrange a compromise between the EU and the UK. With Merkel now anywhere from distracted to disabled, it will be harder to corral all the EU members into reacing an agreement with Britain. I think her problems are profoundly GBP-negative as well as EUR-negative. The difference may be that negative views on GBP are now more likely to be played out in GBP/USD rather than EUR/GBP.
Note that the weekly Commitment of Traders (COT) report out on Friday shows an extremely bullish position in EUR and extremely bearish positions in JPY and CHF. As of Tuesday, speculators held almost the biggest long position in EUR and did hold the biggest short positions in JPY and CHF that they’ve held in the last five years. No wonder they quickly rushed to close some of those positions on potential risky moves. On the other hand, although substantially long gold and silver, they are still within the normal range of positioning in those two assets, which helps explain why positioning was no obstacle to them rallying further on the news.
Of course, positioning doesn’t always determine direction. Even though positioning in WTI is at an extreme too – the biggest long position in the past five years – that didn’t prevent WTI from jumping about 2.5% from Friday morning’s level after Saudi Arabia’s energy minister said OPEC should extend its supply cuts when it meets on 30 November.
By the way, the new turmoil in Europe shouldn’t make us forget the unfolding drama in the US. There were press reports this morning that Mueller has directed the US Justice Department to turn over documents related to the firing of FBI Director James Comey, including any communications between the Justice Department and the White House. Comey’s firing would be the basis of an obstruction-of-justice case against the White House. The document request suggests that Mueller is progressing rapidly. Any new developments here still have the potential to disrupt the thin holiday market.
A relatively quiet start to a relatively quiet week. There are no major indicators out from either Europe or the US.
The major point of interest today will be the meeting of EU Ministers of Foreign and European Affairs in Brussels. They’ll be starting their preparations for the 14-15 Dec European Council summit meeting, a crucial meeting that will decide whether to allow the EU and UK to move to the next stage in the Brexit negotiations and start working on a long-term trade deal. European Council President Donald Tusk Friday said that Britain must deliver “much more progress” on the Brexit divorce bill and the Irish border by the beginning of December, otherwise he would not be able to recommend moving on to that stage. Tusk will meet again with UK PM May on Friday to discuss the issues. The two sides are still quite far away and I do not expect much progress, which is likely to be negative for the pound this week.
ECB President Draghi appears twice at the Committee for Economic and Monetary Affairs (ECON) at the European Parliament today. At 1400 GMT he will appear in his capacity as ECB President, and then at 1600 GMT he will appear in his capacity as the Chair of the European Systemic Risk Board (ESRB), the body responsible for regulating the European financial system. I doubt if he will say anything different than what he usually says, but he may still move the markets.
The US leading index is a second-tier indicator in that it’s comprised of indicators that are already out, so really it contains no new information. Nonetheless it does sometimes move the market. It could do so today. The consensus forecast, +0.7% mom, would be the highest since December 2014. Of course, the 2014 figure came after a positive month whereas this figure comes the month after activity was hit by the hurricanes, but in any event this reminder of the robust bounce-back from the hurricanes could prove positive for the dollar.
Overnight, the Reserve Bank of Australia (RBA) will release the minutes of its 7 November rate-setting meeting. The statement wasn’t much changed – the forward guidance and the section on AUD were exactly the same as in October — and furthermore, the Statement on Monetary Policy was released a few days later. I doubt if the release of the minutes will add much to our understanding of RBA policy.